Germany's Bundesbank has cut its growth outlook for next year as the eurozone
debt crisis deepens but said the economy is well placed to rebound.

The central bank, in a twice-yearly update, said there were "indications that economic activity may actually fall in the final quarter of 2012 and the first quarter of 2013."

Although Germany has managed to keep growing since the eurozone debt crisis began, the pace has slowed this year from 0.5pc in the first quarter of 2012 to 0.2pc in the third quarter.

"The cyclical outlook for the German economy has dimmed," the Bundesbank said.

"However, there are sound reasons to believe that Germany will soon return to a growth path. The sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the labour market, in particular," it said.

Adding to fears of a slowdown in Europe's largest economy were figures showing German output slumped in October and looked set to remain subdued throughout the fourth quarter. Output fell by 2.6 per cent in October, far steeper than economists had expected.

Steffen Seibert, the Government spokesman, said at a regular news briefing in Berlin: "It is no secret that we're in a phase of economic cooling, but we have no doubt that the economy is still in growth mode.

"There are a whole range of indicators which in no way point to recession. The government remains cautiously optimistic."

The Bundesbank expects GDP to expand 0.7pc this year and by just 0.4pc in 2013. This is a sharp downward revision from its previous forecasts in June of 1pc for 2012 and 1.6pc for next year.

The central bank also gave its first estimation for growth in 2014, when the economy is forecast to expand by 1.9pc.

The Bundesbank said its projections were "characterised by a high degree of uncertainty". "It is quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection," it said, but added that "downside risks nonetheless predominate".

"Should global economic growth remain below expectations or the sovereign debt crisis escalate further in some countries, it is probable that the German economy may follow a weaker course than the one assumed in the baseline scenario," it said.

On Thursday, the European Central Bank forecast that the eurozone economy will contract both this year and next year and only return to growth in 2014.